HUMANCAPITALEDUCATIONANDEARNINGS.pptVIP

THE AGE-EARNINGS PROFILE IMPLIED BY HUMAN CAPITAL THEORY Dollars Age-Earnings Profile Age The age-earnings profile is upward-sloping and concave. Older workers earn more because they invest less in human capital and because they are collecting the returns from earlier investments. The rate of growth of earnings slows down over time because workers accumulate less human capital as they get older. * SCHOOLING AND EARNINGS WHEN WORKERS HAVE DIFFERENT RATES OF DISCOUNT Years of Schooling Years of Schooling Rate of Interest 12 12 11 11 rBO rAL MRR Dollars wDROP PAL PBO wHS * SCHOOLING AND EARNINGS WHEN WORKERS HAVE DIFFERENT ABILITIES Years of Schooling Years of Schooling Rate of Interest 12 11 r MRRACE MRRBOB Dollars 12 11 wHS wACE PACE wDROP Z Bob Ace Ace and Bob have the same discount rate r but each worker faces a different wage-schooling locus. Ace drops out of high school and Bob gets a high school diploma. The wage differential between Bob and Ace wHS - wDROP arises both because Bob goes to school for one more year and because Bob is more able. As a result, this wage differential does not tells us by how much Ace’s earnings would increase if he were to complete high school wACE - wDROP . * 3. IS EDUCATION A GOOD INVESTMENT? 1 Is Education a Good Investment for Individuals The rate of return typically estimated for the U.S. generally fall in the range of 5-15 percent. At first glance, an investment in education is about as good as an investment in stocks, bonds, or real estate. * EDUCATION AND THE WAGE GAP Observed data on earnings and schooling does not allow us to estimate returns to schooling. In theory, a more able person gets more from an additional year of education. Ability bias: The extent to which unobserved ability differences exist affects estimates on returns to schooling, since the ability difference may be the true source of the wage differential. * ESTIMATING THE RATE OF RETURN TO SCHOOLING A typical empirical study estimates a regression o